Part 2: Potential Investors – Pros and Cons

When preparing to seek investment capital, you need to understand which type of investor may be interested in investing in your business. There are several different categories of investors, and each class has unique objectives and preferences that require different approaches.

Potential investors include (1) competitors, suppliers, and regular customers; (2) friends and family; (3) angel investor groups; (4) employees; (5) financial investors; and (6) strategic investors. I’ve broken the discussion into two parts. Earlier I covered competitors, suppliers and regular customers, friends, and family, and angel investor groups.

In part two of this series, I’ll discuss employees, financial, and strategic investors in part two of this series.

Employees

Your team may be able to provide additional capital by investing in your company.

Pros: In addition to providing funding, your employees may help you attract and retain other good personnel, improve business performance, and offer tax benefits depending upon the ownership structure. Employees who invest are naturally motivated to ensure the company’s success.

Cons: There are challenges in determining the best way to set up your legal structure to accommodate employee ownership. An employee stock ownership plan (ESOP) is one option. ESOPs provide tax benefits, but legal and administrative costs may be too much for many smaller companies to undertake. Consult with your tax and legal advisors to determine additional options when considering employee investors.

Financial investors

These are professional investors who typically have a fund available to invest with the primary goal of achieving a healthy financial return. They include private equity, venture capital, and investment funds.

Pros: This option offers access to multi-million dollar investments.

Cons: Financial investors may require additional time and extra cost to complete the transaction. They may insist upon maintaining close oversight of your business after they have invested in your company. They may be searching only for short-term growth and may not be as emotionally invested as other parties. They may reduce the company to improve profit margins and continue under their ownership to resell it at a substantial profit a few years later.

Strategic investors

These types of investors seek to gain access to a new product, technology, customer list, or geographic location. They are usually in a similar industry. Strategic investors include corporate venture capital subsidiaries of large corporations. For example, M12 (formerly Microsoft Ventures) is the corporate venture capital subsidiary of Microsoft and GV (formerly Google Ventures); they provide seed, venture, and growth stage funding to technology companies.

Pros: This option offers access to multi-million dollar investments.

Cons: Strategic criteria may be subjective. The time and cost of completing the transaction may be prohibitive. Usually, strategic investors require close oversight.

Do one thing: When preparing to seek investment capital for your company, make sure you understand the different types of investors and their advantages and disadvantages. Then, match the right type of investor to achieve your company vision.